Patrick Doyle, who has been executive chairman at Restaurant Brands International for three months, began Tuesday morning’s fourth-quarter earnings call with an opening that should be music to the ears of the franchisees that operate just about all the restaurants for each of its four brands: That their profitability will be at the forefront of the company’s strategy.
“One of the themes you’ll hear a lot from us going forward is the importance of franchisee success,” Doyle said. “It’s at the heart of everything we do. When restaurant-level profitability is strong and growing, it means our franchisees increasingly have more money to invest in their restaurants, in modern digital menu boards, refreshing kitchen equipment, opening new locations and feeling the pride of creating exceptional guest experiences.”
Profitability is indeed important for franchise brands to accomplish what they need. Doyle was brought in as RBI executive chairman last year, and given a potentially lucrative package that’s locked in over a five-year period, to drive accelerated growth at the owner of Popeyes, Burger King, Tim Hortons and Firehouse Subs. That kind of growth starts with improved profitability at the store level, something Doyle accomplished as CEO of Domino’s Pizza for eight years.
At the same time, operators of Burger King, in particular, could be excused for having a bit of skepticism on that front. RBI, like many franchise-focused companies, has talked a lot for years about improving franchise profitability.
And those profits have taken a hit recently. To make his case, Doyle publicized the average store-level EBITDA, or earnings before interest, taxes, depreciation and amortization, for RBI’s three biggest brands. Each of them has seen considerable declines since 2018, the last time RBI publicly published such figures.
Operators know why these profitability numbers are down. Food costs took off last year, rising more than 14% year over year in the U.S., while wage rates rose more than 10%. That’s assuming operators could even find enough people to staff their restaurants. The cost of rent and energy went up and so did interest rates.
“The reasons are known to most of you,” Doyle said. “Recovering post pandemic, all-time high commodity cost increases, generationally high inflation. Those aren’t excuses. And what matters in my opinion is our baseline today.”
For Burger King, however, the profitability numbers are particularly discouraging and troublesome. The brand’s store-level profits increased by $70,000 per location between 2013 and 2017 and hit $180,000 per location by 2018. The decline in the years since then has wiped out much of that growth.
Burger King restaurants feature three dayparts and drive-thrus, making them generally expensive to operate. With average unit volumes of $1.4 million, however, it doesn’t take much to wipe out that $140,000 in store-level earnings. It also illustrates the challenges at the quick-service burger brand.
Those challenges were highlighted with the bankruptcy filing last month of the 90-unit franchisee Toms King. “We have hundreds of franchisees across the country, many of whom are experienced local operators,” Josh Kobza, the chief operating officer set to take over as RBI CEO on March 1, told investors. “It’s also clear that we have operators who are struggling, and we’re actively working to help them improve or transition their portfolios to more engaged, operationally strong franchisees.”
Burger King has substantial incentives to get profitability up for its franchisees. The company’s recent $400 million investment in the brand includes this nugget: If franchisee store-level EBITDA hits $175,000 in the U.S. by 2023, operators will increase their contribution to the ad fund by a half a percent. That’s a substantial boost in marketing.
To be sure, Burger King is not the only brand that has seen profitability decrease. Tim Hortons operators in Canada and Popeyes’ U.S. franchisees have also seen earnings decline and, outside RBI, McDonald’s franchisees’ store-level cash flow declined by $100,000 last year. But the general health of the Burger King franchisee base has intensified the importance of fixing that brand.
RBI executives believe that remodels and operations improvements can bring about the profitability Burger King needs for a true turnaround. Burger King is working with operators to streamline kitchens and improve operations, which could help profitability grow over time, Doyle said.
The company is speeding the investment of $50 million into point-of-sale terminals, display screens and digital menu boards, spending franchisees are matching. And nearly a quarter of the applications Burger King has received for funding help on remodels are for scrape-and-rebuild plans, which generate a stronger sales uplift.
Company executives say they are already seeing signs of improvement. Customer satisfaction is up 40% at Burger King since mid-2021, for instance. And operator profitability was up 40% in the fourth quarter, after same-store sales rose 5% in the U.S. in the period.
But the brand still has some ways to go. “We know that one of the best ways to improve the financial health of our franchisees is to drive traffic and topline sales while thoughtfully implementing initiatives to improve the bottom line,” Kobza said. “We also know that strong operations are correlated with franchisee profitability.”